US economy grows at 3.3% annual pace in fourth quarter, faster than expected

[KenH]

For those interested in maintaining the purchasing power of the U.S. dollar, I highly recommend this book(free pdf):

Gold: The Monetary Polaris GTMP-ed4-eBook-1.pdf

 

[JonC]

Yes… another guess by the economy experts… lol!

No guess. Inflation is above the target.

When inflation drops so should interest rates (depending on the target). When inflation is too low interest rates are lowered to increase inflation.

What we have to remember is that deflation is more dangerous than inflation. Gotta think back to high school economics...a long long time ago in a school system far far away.

 

[JonC]

Inflation is not required for economic growth.

Are you perhaps referring to a fixed growth rate rule for the money supply?

I agree. Inflation is the result of economic growth. A 0% inflation rate is a stagnant economy. The interest rate is one controlling mechanism. It moves with inflation but is manipulated to reach a target.

We think often of inflation (probably because we see it when we buy our products), but deflation is a more serious economic condition.

 

[KenH]

Inflation is the result of economic growth.

Inflation is the increase of the supply of money beyond the increase in productivity.

I realize that it seems we all wrongly conflate inflation with the overall increase in prices, probably because the overall increase in prices is called "inflation" by the media.

 

[JonC]

Slow deflation is not dangerous at all.

It depends on the level. The value of the dollar would increase, which is good. But if it is unchecked unemployment would rise. I'm not saying a slow deflation isn't what we need now....but it is not always good (and inflation is not always bad).

A deflationary economy is bad (worse than a hyper inflated economy).

 

[KenH]

A 0% inflation rate is a stagnant economy.

False.

"Since the disastrous 1930s, economists and central bankers seem to have lost sight of the fact that there are two kinds of deflation—one malign, the other benign. Malign deflation, the kind that accompanied the Great Depression, is a consequence of shrunken spending, corporate earnings, and payrolls. Strictly speaking, even in this case, it is not so much deflation itself that is harmful as its underlying cause, an inadequate money stock. The hoarding of money, or its actual disappearance (the quantity of money in the U.S. economy actually shrank 35 percent between 1930 and 1933), causes the demand for goods and services to dry up. In response, firms are forced to curtail production and to lay off workers. Prices fall, not because goods and services are plentiful, but because money is scarce.

Benign deflation is something else altogether. It is a result of improvements in productivity, that is, occasions when changes in technology or in management techniques allow greater real quantities of finished goods and services to be produced from a given quantity of land, labor, and capital. Because an increase in productivity is the same thing as a decline in unit costs of production, a productivity‐driven decline in the prices of finished goods and services needn’t involve any decline in producers’ earnings, profits, or payrolls. Lower costs are matched by correspondingly lower consumer prices, not by lower wages or incomes. Such productivity‐driven deflation is actually good news to the average breadwinner.

Benign deflation is a relatively unfamiliar concept both because modern economists devote relatively little attention to it (focusing all their discussions on inflation or on deflation of the malignant sort) and because monetary policymakers in the United States and elsewhere have prevented benign deflation from occurring throughout most of the 20th century. Thus, since World War II, the United States has witnessed frequent gains in productivity. The real (inflation‐adjusted) unit cost of production of goods and services today is approximately half of what it was in 1945. Yet the general price level, instead of being half as high as it was after the war, has increased to over nine times its former level. Instead of allowing goods’ prices to fall along with their falling real costs of production, the Fed has artificially inflated those prices by pumping large amounts of money into the economy. The last time productivity improvements were allowed to be reflected, partially and temporarily, in a fallen price level was in 1955, 44 years ago. And that was not by design but by accident.

Yet ongoing, benign deflation is not just a hypothetical possibility. Many Western nations experienced something like it between 1873 and 1896, when the gold standard placed limits on Western governments’ ability to offset the effects of productivity improvements through monetary expansion. Although national price levels declined almost continuously from 1873 to 1896, causing scholars for a time to refer to the era in question as the world’s first “Great Depression,” every other economic indicator—prices, wages, profits, industrial output, trade—shows the period to have been one of unprecedented growth and prosperity. The period had its share of genuine depressions, to be sure, but those cyclical downturns were a result of faulty financial legislation. No harm seems to have come from allowing a downward trend in prices so long as that trend reflected ongoing gains in productivity."

- from https://www.cato.org/policy-report/may/june-1999/plea-mild-deflation

 

[KenH]

inflation is not always bad

Inflation, an increase in the supply of money beyond the increase in productivity, is ALWAYS bad.

 

[JonC]

Inflation is the increase of the supply of money beyond the increase in productivity.

I realize that it seems we all wrongly conflate inflation with the overall increase in prices, probably because the overall increase in prices is called "inflation" by the media.

Deflation does indicate a rise in the value of the dollar. But inflation is more than an increase supply of money just like deflation is more than an increased monetary value.

There are pros and cons to each, and people will be affected by differently depending on their situation.

In an inflationary economy (normal, not hyper) the unemployment rate typically lowers, and you would make a greater return on your investments. But your dollar is worth (obviously) less. And there is a greater monetary supply.

In a deflationary economy investment return is low, unemployment is typically high. But your dollar is worth more. And there is a decrease in monetary supply.

 

[KenH]

Deflation does indicate a rise in the value of the dollar. But inflation is more than an increase supply of money just like deflation is more than an increased monetary value.

There are pros and cons to each, and people will be affected by differently depending on their situation.

In an inflationary economy (normal, not hyper) the unemployment rate typically lowers, and you would make a greater return on your investments. But your dollar is worth (obviously) less. And there is a greater monetary supply.

In a deflationary economy investment return is low, unemployment is typically high. But your dollar is worth more. And there is a decrease in monetary supply.

Obviously, we have different views on economics, especially on the economic evils of inflation.

 

[KenH]

And there is a decrease in monetary supply.

If the monetary supply is kept steady, and productivity increases, then prices will drop where those productivity increases are allowed to manifest themselves.

 

[KenH]

By the way, @JonC , on economics, I am an Austrian. Are you a Keynesian?

 

[JonC]

False.

"Since the disastrous 1930s, economists and central bankers seem to have lost sight of the fact that there are two kinds of deflation—one malign, the other benign. Malign deflation, the kind that accompanied the Great Depression, is a consequence of shrunken spending, corporate earnings, and payrolls. Strictly speaking, even in this case, it is not so much deflation itself that is harmful as its underlying cause, an inadequate money stock. The hoarding of money, or its actual disappearance (the quantity of money in the U.S. economy actually shrank 35 percent between 1930 and 1933), causes the demand for goods and services to dry up. In response, firms are forced to curtail production and to lay off workers. Prices fall, not because goods and services are plentiful, but because money is scarce.

Benign deflation is something else altogether. It is a result of improvements in productivity, that is, occasions when changes in technology or in management techniques allow greater real quantities of finished goods and services to be produced from a given quantity of land, labor, and capital. Because an increase in productivity is the same thing as a decline in unit costs of production, a productivity‐driven decline in the prices of finished goods and services needn’t involve any decline in producers’ earnings, profits, or payrolls. Lower costs are matched by correspondingly lower consumer prices, not by lower wages or incomes. Such productivity‐driven deflation is actually good news to the average breadwinner.

Benign deflation is a relatively unfamiliar concept both because modern economists devote relatively little attention to it (focusing all their discussions on inflation or on deflation of the malignant sort) and because monetary policymakers in the United States and elsewhere have prevented benign deflation from occurring throughout most of the 20th century. Thus, since World War II, the United States has witnessed frequent gains in productivity. The real (inflation‐adjusted) unit cost of production of goods and services today is approximately half of what it was in 1945. Yet the general price level, instead of being half as high as it was after the war, has increased to over nine times its former level. Instead of allowing goods’ prices to fall along with their falling real costs of production, the Fed has artificially inflated those prices by pumping large amounts of money into the economy. The last time productivity improvements were allowed to be reflected, partially and temporarily, in a fallen price level was in 1955, 44 years ago. And that was not by design but by accident.

Yet ongoing, benign deflation is not just a hypothetical possibility. Many Western nations experienced something like it between 1873 and 1896, when the gold standard placed limits on Western governments’ ability to offset the effects of productivity improvements through monetary expansion. Although national price levels declined almost continuously from 1873 to 1896, causing scholars for a time to refer to the era in question as the world’s first “Great Depression,” every other economic indicator—prices, wages, profits, industrial output, trade—shows the period to have been one of unprecedented growth and prosperity. The period had its share of genuine depressions, to be sure, but those cyclical downturns were a result of faulty financial legislation. No harm seems to have come from allowing a downward trend in prices so long as that trend reflected ongoing gains in productivity."

- from https://www.cato.org/policy-report/may/june-1999/plea-mild-deflation

No, not false. You are just thinking short-term benefits


"A normal period of economic growth would typically give a moderate rate of inflation (2%). If inflation has fallen to 0%, it suggests that there is intense price pressure to encourage spending and the recovery is very fragile.

Zero inflation is often welcomed by average consumers. They will benefit from cheaper prices and the feeling of more disposable income. This ‘feel good’ factor may encourage stronger confidence – investment, spending and growth. In the current climate, low inflation could be a blessing in disguise.

However, there is also a real danger that if we get stuck in a period of ultra-low inflation/deflation, then all the problems of deflation will become more prominent and start to hold back normal economic growth."


Zero Is Not the Optimal Rate of Inflation on JSTOR

The Future of Inflation Part II: How Costly Is Inflation?

What is deflation?

Is zero inflation a good thing? - Economics Help

Low inflation vs. No inflation vs. Deflation

 

[KenH]

No, not false.

Yes, false. But, as I said, I am an Austrian on economics. Of course, it fits with my overall classical liberal, minarchist, libertarian political philosophy.

 

[JonC]

By the way, @JonC , on economics, I am an Austrian. Are you a Keynesian?

I'm kinda in between the two (primarily Austrian, but only in a perfect world).

 

[JonC]

Yes, false. But, as I said, I am an Austrian on economics. Of course, it fits with my overall classical liberal, minarchist, libertarian political philosophy.

No, not false. We are talking economic theories. Neither is actually false.

We have seen nations reach 0% inflation, spiral into a deflationary economy, and struggle for decades to recover. So we have seen that 0% inflation struggles economic growth.

But does it always? We can't say because that is speculation.

 

[KenH]

I'm kinda in between the two (primarily Austrian, but only in a perfect world).

I think the main difference between us is that, if the Federal Reserve restrains inflation over 10 years to a 2% average which would result in a decrease in overall purchasing power of 21.9%, you apparently think that is okay; whereas, I think it is awful.

 

[KenH]

We have seen nations reach 0% inflation, spiral into a deflationary economy, and struggle for decades to recover. So we have seen that 0% inflation struggles economic growth.

One also has to take into account what effects government interference on the economy. The money supply is not the only influence.

 

[JonC]

One also has to take into account what effects government interference on the economy. The money supply is not the only influence.

I agree. That's why I said I'm kinda in between the two.

The government needs to have some means of influencing the economy in order to mitigate the effects of "naturally" occuring events. This does give us an artificial economy (inflation or deflation, rise or decrease in interest, etc. above what would have occurred without interference).

 

[JonC]

I think the main difference between us is that, if the Federal Reserve restrains inflation over 10 years to a 2% average which would result in a decrease in overall purchasing power of 21.9%, you apparently think that is okay; whereas, I think it is awful.

In "a vacuum", perhaps.

 

[Earth Wind and Fire]

No guess. Inflation is above the target.

When inflation drops so should interest rates (depending on the target). When inflation is too low interest rates are lowered to increase inflation.

What we have to remember is that deflation is more dangerous than inflation. Gotta think back to high school economics...a long long time ago in a school system far far away.